Food Wars

My Three Cents

Makovsky

Friday, August 1, 2014

Last week, Chipotle posted extremely impressive earnings, beating all the analyst’s expectations by a long shot. In comparison, McDonald’s reported another quarter of lackluster sales growth in the United States. Over the last several years, McDonald’s has been struggling to stay relevant while fresher concepts like Chipotle seem to be printing money. Why is that?

In the high-volume restaurant world, same store sales are one of the most important success metrics. In three of the last four quarters McDonald’s has seen flat to negative same store salesin the United States, last week they decreased 1.5%. In comparison, Chipotle just posted a whopping 17% increase. According to the Wall Street Journal, the U.S. has been a particularly challenging market for McDonald’s.

Here are a few possible reasons:

Consumers Want Healthier Options

There is plenty of evidence around this, from declining sales for three straight years of carbonated soft drinks to explosive sales growth of Greek Yogurts. Fast food giants have tried to adapt with new menu items but apparently have had difficulty changing perceptions that their menu is now healthier. On the other hand, forward thinking Chipotle has seen enormous success with their new soy-based vegetarian protein option, “Sofritas.” Adding fuel to the fire, consumer advocacy groups are even blasting restaurants for having extremely unhealthy menu items.

Consumers Want Food “Their Way “

Over the last several years, we have seen the emergence of the quick service restaurant. These concepts like Chipotle and Panera Bread have a better experience and provide more options for consumers. They are also more flexible when it comes to ingredients and customers are now used to the ability to customize burritos, salads and sandwiches to their personal tastes.

Consumers Want To Know Where Their Food Comes From

Another major change in the food world is a growing consumer interest in where their food comes from. A recent New York Times piece quoted a National Restaurant Association research analyst who claimed ingredients that are locally grown and sustainable are at the top of the biggest customer priorities, and it is not a fad. New chains like Tender Greens and LYFE Kitchen have made this part of their brand DNA to take advantage of this trend. It’s even spun off a new buzzword, “Farm to Counter.” Other established brands like Chipotle have launched transparency campaigns to cater to these customers.

Reliance on the “Limited Time Item” Band Aid

For way too long the fast food industry has been relying on special limited time menu items to drive sales. While this tactic works in the short term, in the long term it does nothing to help the company adapt to these changes in consumer tastes. Taco Bell is the best at this and has come up with endless permutations using the same ingredients. The Doritos Locos Taco was a huge hit, but how many times can a brand repeat this same song and dance?

So what can giant fast food brands like McDonald’s and Yum do to ensure their long-term future? The most obvious answer seems to be making investments in new concepts that can keep up with the changes in consumer tastes. Back in the early 2000’s, McDonald’s made big investments in new up-and-coming brands — Chipotle and Pret A Manger — but ultimately decided to divest and focus on their core business after the recession. Now, looking at Chipotle’s and Pret A Manger’s growth, it seems to have been a lapse in McJudgment.